MIE Class #12 Manufacturing & Engineering Economics Concerns and Questions Concerns and Questions Quick Review Quick Review Today’s Focus: Today’s Focus: – Chap 5 Estimating for Economic Analyses Hmwk #6 Due in 1 Week: Hmwk #6 Due in 1 Week: – Chap 5 - 3(e), 4, 6, 9, 13, 17, 23, 26

Concerns and Questions? b Term Project - distributed in 1-2 weeks b Mid-Term Exam - to be determined (approx 2-3 weeks)

Quick Recap of Previous Class  Concurrent Engineering  Paradigm Shift  Design Process  Pugh Method  QFD Process and House of Quality  Other design techniques (for improved quality, reduced costs, reduced time to market)

Estimating for Economic Analyses b What is a cost estimate? A forecast of expenses (and revenues) that may be incurred in the manufacture of a product (or the delivery of a service).A forecast of expenses (and revenues) that may be incurred in the manufacture of a product (or the delivery of a service).

What is the purpose of a cost estimate? b Provide information used in setting a selling price (quotation, bidding, or evaluating contracts) b Determine whether a proposed product can be made and distributed at a profit b Basis for make versus buy decisions (parts and assemblies)

b Determine how much can be invested in tooling and equipment and/or to compare various manufacturing methods b Basis for cost reduction and value engineering What is the purpose of a cost estimate?

b New products/designs: Determine personnel requirementsDetermine personnel requirements Predict material needs for production runsPredict material needs for production runs Setting overall schedule for meeting goalsSetting overall schedule for meeting goals Specifying equipment, machines, and facilities for manufacturing the desired product on time and in the numbers requiredSpecifying equipment, machines, and facilities for manufacturing the desired product on time and in the numbers required What is the purpose of a cost estimate?

Sources of Errors in Cost Estimating?

Sources of Data  Accounting Records  Other Sources Within the Firm  Sources Outside the Firm  Research & Development

Quantitative Estimating Techniques 1. Time-series - when cost (revenue) elements are a function of time. Collect data; study underlying relationships. Regression - estimating causal relationships within time-series dataRegression - estimating causal relationships within time-series data Exponential Smoothing - estimating future extensions to historical data patternsExponential Smoothing - estimating future extensions to historical data patterns

Quantitative Estimating Techniques 2. Subjective - expert judgment is applied to the results of time-series techniques (how future might differ from the past) Delphi Technique - voice opinions anonymously and through an intermediaryDelphi Technique - voice opinions anonymously and through an intermediary Technology Forecasting - procedures for data collection and analysis to predict future technological developments and their impactsTechnology Forecasting - procedures for data collection and analysis to predict future technological developments and their impacts

Quantitative Estimating Techniques 3. Cost Engineering - identify and utilize various revenue/cost drivers to compute estimates

Correlation and Regression Analysis  Looking for explainable association between variables  Fit line through data (estimate a and b) to minimize squared error y = a + bx b=a=

What if relationship is not linear? Good reference: Makridakis, S. and Wheelwright, S. Forecasting Methods and Applications, John Wiley & Sons.

Correlation Coefficient - relative measure of the association between two variables (-1  r  1) r = r = 0 no correlation r =  1perfect correlation

Example Problem 5-5: Operating costs Production volume ($M)(hundreds of units) , b Determine regression line b Estimate oper costs for 950 units b Calc coeff of correlation (good fit?)

Exponential Smoothing  Assumes trends and patterns of the past will continue into the future  More weight on current data  No assumption of linearity with  ’= smoothing constant, S t =  ‘x t + (1 -  ‘)S t-1 (0  ’  1) Usually (0.01  ’  0.30)

(Forecast for period t+1, made in period t)=  ’(Actual data point in period t)  ’(Actual data point in period t) + (1-  ’)(Forecast for period t, + (1-  ’)(Forecast for period t, made in period t-1) made in period t-1)  ’ = 1 implies?  ’ = 0 implies?

Example Problem 5-8 b Worked In Class